(iii) Make recommendations concerning serviceability and unserviceability; (iv) Undertake necessary screening and redistribution; and

(v) Assist the contractor in accomplishing other disposition.

(c) An initial conference shall be held with the contractor as promptly as possible to develop a definite program for effecting the settlement. Where appropriate in the judgment of the contracting officer after consulting the prime contractor, principal subcontractors should be present. Topics discussed at the conference should include:

(1) General principles relating to the settlement of any termination claim, including obligations of the contractor under the termination clause of the contract;

(2) Extent of the termination, point at which work is stopped, and status of any plans, drawings, and information which would have been delivered had the contract been completed;

(3) Status of any continuing work; (4) Obligation of the contractor to terminate subcontracts and general principles to be followed in settlement of subcontractor claims;

(5) Names of subcontractors involved and the respective dates termination notices were issued to them;

(6) Contractor personnel handling, and methods for, review and settlement of subcontractor claims;

(7) Arangements for transfer of title and delivery to the Government of any material required by the Government;

(8) General principles and procedures to be followed in the protection, preservation, and disposition of contractor's and subcontractors' termination inventories, including the preparation of termination inventory schedules;

(9) Contractor accounting practices and submission of accounting data (see § 1-8.307-1(c));

(10) Form in which settlement proposals shall be submitted;

(11) Accounting review of settlement proposals;

(12) Any requirement for interim financing in the nature of partial payments; and

(13) Tentative time schedule for negotiation of the settlement, including submission by the contractor and subcontractors of settlement proposals, termination inventory schedules, and accounting information schedules.

99-187-69- -14

§ 1-8.206 Fraud or other criminal conduct.

Whenever the contracting officer has reason to suspect fraud or other criminal conduct in connection with the settlement of a terminated contract, he shall discontinue all negotiations with the contractor and shall report the facts in accordance with agency procedures.

§ 1-8.207 Accounting review of prime contract settlement proposals and of subcontract settlements.

(a) Each settlement proposal submitted by a prime contractor shall be referred by the contracting officer to the agency audit office for appropriate examination and recommendation when the amount of claim (see § 1-8.101(a)) is $2,500 or over. The contracting officer may, when circumstances indicate the necessity therefor, refer a settlement proposal to the agency audit office when the amount of claim is less than $2,500. The referral shall be in writing, shall indicate any specific information or data which the contracting officer desires to have developed, and shall include any facts or circumstances within the knowledge of the contracting officer which will assist the agency audit office in the performance of its function. The agency audit office should develop such information and should make such further accounting review as it deems appropriate. The agency audit office should submit written comments and recommendations to the contracting officer, in accordance with agency procedures.

(b) Subcontract settlements submitted by a contractor to the contracting officer for approval or ratification in accordance with § 1-8.208 shall be referred to the agency audit office for review and recommendations if (1) the amount of settlement is $25,000 or more, unless an accounting review of the settlement proposal has been performed by the agency audit office, or (2) the contracting officer considers an accounting review, in whole or in part, desirable. The review under (1) or (2) does not relieve the prime contractor or higher tier subcontractor of the responsibility for performing an accounting review. The agency audit office should submit written comments and recommendations to the contracting officer, in accordance with agency procedures.

(c) (1) The responsibility of the prime contractor and of each subcontractor, set forth in § 1-8.208-1, for settlement of

immediate subcontractors' settlement proposals includes responsibility for performing accounting reviews and any necessary field audits. However, in the situations outlined in (i) through (iv) of this § 1-8.207(c) (1), the agency audit office generally should be requested to perform the accounting review of a subcontractor's settlement proposal where:

(i) A subcontractor objects to an accounting review of his records by an upper tier contractor for competitive reason;

(ii) The agency audit office currently is performing audit work at the subcontractor's plant, or where it can be performed more economically or efficiently;

(iii) Audit by the agency audit office is necessary for consistent audit treatment and orderly administration;

or

(iv) The contractor has a substantial or controlling financial interest in the subcontractor.

(2) Duplication by the agency audit office of accounting reviews performed by the upper tier contractor on subcontractor settlement proposals should be avoided to the extent possible. However, when appropriate, the Government should make additional reviews. Where the contractor is performing accounting reviews in accordance with this § 1-8.207, the contracting officer should request the agency audit office to examine periodically the contractor's accounting review procedures (including but not limited to audit programs, cost principles applied, working papers, and audit reports) and performance thereunder and make such comments and recommendations to the contracting officer as may be deemed appropriate. § 1-8.208

claims.

Settlement of subcontract

§ 1-8.208-1 Subcontractor's rights.

Unless otherwise specifically provided, a subcontractor has no contractual rights against the Government upon the termination of a prime contract. The rights of a subcontractor are against the prime contractor or intermediate subcontractor with whom he has contracted. Upon termination of a prime contract, the prime contractor and each subcontractor are responsible for the prompt settlement of the termination claims of their immediate subcontractors.

§ 1-8.208-2 Prime contractor's rights and obligations.

Each termination for convenience clause provides that, after receipt of a notice of termination, the prime contractor shall (except as otherwise directed by the contracting officer) terminate all subcontracts to the extent that they relate to the performance of any work terminated by a notice of termination. Prime contractors should, for their own protection, include a termination clause in their subcontracts. A suggested subcontract termination clause is set forth in § 1-8.706. The failure of a prime contractor to include an appropriate termination clause in any subcontract, or to exercise his rights thereunder, shall not (a) affect the right of the Government to require the termination of the subcontract, or (b) increase the obligation of the Government beyond that which would have arisen if the subcontract had contained an appropriate termination clause. In any such case, the reasonableness of the prime contractor's settlement with the subcontractor should normally be measured by the aggregate amount which would be due under subparagraphs (1), (2), and (3) of paragraph (e) of the suggested subcontract termination clause. Reimbursement in excess of that amount shall be allowed only in unusual cases, and then only when the contracting officer is satisfied that the terms of the subcontract were negotiated in good faith and did not unreasonably increase the rights of the subcontractor.

§ 1-8.208-3 Settlement procedure.

(a) Settlements with subcontractors shall be made in general conformity with the policies and principles relating to settlement of prime contracts as set forth in this Subpart 1-8.2 and in Subparts 1-8.3 or 1-8.4, as applicable. However, the basis and form of the subcontractor's settlement proposal must be acceptable to the prime contractor or the next higher tier subcontractor. Each such settlement shall be supported by accounting and other data sufficient for adequate review by the Government. In no event shall the Government pay to the prime contractor any amount for loss of anticipatory profits or consequential damages resulting from the termination of any subcontract (but see § 1-8.208-5).

(b) Except as provided in § 1-8.208-4,

(1) all subcontractor termination inventory shall be disposed of and accounted for in accordance with Subpart 1-8.5, and (2) the contracting officer shall require the prime contractor to submit to him for approval or ratification all termination settlements with subcontractors. In submitting each settlement, the prime contractor shall certify that he has examined the subcontractor's claims included therein, that they are allocable to the terminated portion of the prime contract (or are the result of a change order-see § 1-8.000 (d) (1)), and that the settlement is fair and reasonable, was negotiated in good faith, and is not more favorable to the subcontractor than if the Government were not involved. The contractor shall also certify that he has received from all his immediate subcontractors certifications substantially in the form of his own certification. With respect to settlements with more remote subcontractors, the contractor shall certify that he has no information leading him to doubt their reasonableness or their allocability to the terminated portion of the prime contract.

(c) The contracting officer shall promptly examine each subcontract settlement required to be submitted to him (including the basis and form of the proposal upon which the settlement was based) to satisfy himself that the subcontract termination was made necessary by the termination of the prime contract (or by issuance of a change ordersee § 1-8.000 (d) (1)), and that the settlement was arrived at in good faith, is reasonable in amount, and is allocable to the terminated portion of the contract (or, if allocable only in part, that the proposed allocation is reasonable). In considering the reasonableness of any subcontract settlement, the contracting officer shall be guided generally by the provisions of this Part 1-8 relating to the settlement of prime contracts, and shall comply with any applicable requirements of §§ 1-8.207 and 1-8.211 relating to accounting and other reviews. Upon completion of the examination, the contracting officer shall notify the contractor in writing of (1) his approval or ratification, or (2) his reasons for disapproval.

contractor, authorize him in writing to conclude settlements of his terminated subcontracts without approval or ratification by the contracting officer when the amount of settlement (see § 1-8.101 (a)) is $10,000 or less and if:

(i) The contracting officer is satisfied with the adequacy of the procedures used by the contractor in settling termination claims (including proposals for retention, sale, or other disposal of termination inventory) of his immediate and lower tier subcontractors. (The contracting officer shall obtain the advice and recommendations of (A) the agency audit office with respect to the adequacy of the contractor's audit administration, including personnel, and (B) the cognizant disposal office with respect to the adequacy of the contractor's procedures and personnel for the administration of property disposal matters.);

(ii) Any termination inventory included in determining the amount of the settlement will be disposed of in accordance with § 1-8.513, except that the disposition of such inventory shall not (A) be subject to review by the contracting officer under § 1-8.513-1 or § 1-8.5133, or (B) be subject to § 1-8.513-4; and

(iii) The settlement will be accompanied by a certificate substantially similar to the certificate contained in the appropriate settlement proposal format set forth in § 1-8.802.

(2) An authorization granted under (a)(1) of this § 1-8.208-4 may be exercised only in settling subcontracts which have been terminated as a result of termination for convenience or modification of the prime contract by the Government.

(b) Section 1-8.513 shall apply to any disposal of completed end items allocable to the terminated subcontract, except that completed end items allocable to the terminated subcontract may be disposed of without review by the contracting officer under § 1-8.513-1 or § 1-8.513-3, and without screening under § 1-8.513-4, if the total amount thereof (at the subcontract price) when added to the amount of the settlement does not exceed the amount authorized under this § 1-8.208-4.

(c) A contracting officer granting the above authorization to a contractor shall be responsible for periodically making a selective review of settlements and settlement procedures to determine (1) whether the contractor is making adequate reviews and fair settlements, and

(2) whether such authorization shall remain in effect. In connection with these periodic reviews, the contracting officer should obtain the advice and recommendations of the agency audit office with respect to the auditing aspects of the contractor's review procedures and those of the cognizant disposal office with respect to property disposal aspects of the contractor's review procedures. Whenever the contracting officer determines that the contractor's procedures are not adequate or that improper settlements are being made, he shall revoke the authorization by written notice to the contractor. The revocation shall take effect only from the date of receipt.

(d) Any number of separate settlements may be made with a single subcontractor. However, claims which normally would be included in a single settlement proposal, such as those based on a series of separate orders for the same item under one contract, shall be consolidated wherever possible, and shall not be divided in order to bring them within an authorization.

(e) Upon written request of the contractor and with the prior written approval of the head of the procuring activity or of a deputy or principal assistant in the procuring activity responsible for contract matters, an authorization granted under (a) (1) of this § 1-8.208-4 may be increased to authorize the contractor to conclude settlements under a particular prime contract when the amount of settlement is more than $10,000 but not more than $25,000. Such authorization in excess of $10,000 may be limited to specific subcontracts or classes of subcontracts.

upon its termination, in whole or in part, are fair and reasonable and do not unreasonably increase the common law rights of the subcontractor;

(3) The contractor has made reasonable efforts to settle the claim of the subcontractor;

(4) The contractor has given prompt notice to the contracting officer of the initiation of the proceedings in which the judgment was rendered and has not refused to give the Government control of the defense of the proceedings; and (5) The contractor has diligently defended the suit or, if the Government has assumed control of the defense of the proceedings, has rendered such reasonable assistance as has been requested by the Government.

(b) If the conditions stated in (1) through (5) of § 1-8.208-5 (a) are not all met, the contracting officer may allow the contractor such part of the judgment as he considers a fair amount for settling the termination claim under the subcontract, giving due regard to the policies set forth in this Part 1-8 for settlement of such claims.

(c) Where a contractor and his subcontractor submit a subcontractor termination claim to arbitration under any applicable law or contract provision, the contracting officer shall recognize the amount of the arbitration award as the cost of settling the claim of the subcontractor to the same extent and under the same conditions as specified in (a) and (b) of this § 1-8.208-5.

§ 1-8.208-6

Delay in settlement of subcontractor claims.

Where a prime contractor is unable to settle with a subcontractor and such inability is delaying the settlement of the prime contract, the contracting officer may settle with the prime contractor, excepting from the settlement the whole or any part of the claim of such subcontractor and reserving the rights of the Government and of the prime contractor with respect thereto.

§ 1-8.208-7 Government assistance in settlement of subcontracts.

In unusual cases the contracting officer may determine that it is in the best interest of the Government to offer assistance to the prime contractor in the settlement of a particular subcontract. Such a situation may exist when the prime contractor has made all reasonable efforts to negotiate the settlement

(a) The termination for convenience clauses set forth in Subpart 1-8.7, except the short-form clauses, obligate the prime contractor to assign to the Government, in the manner, at the times, and to the extent directed by the contracting officer, all his right, title, and interest under any subcontracts terminated by reason of termination of the prime contract. The contracting officer shall not require such assignment unless he determines that it is in the best interest of the Government.

(b) In giving the Government the right to require the assignment of the prime contractor's interest in terminated subcontracts, the termination for convenience clauses set forth in Subpart 1-8.7 (except the short-form clauses) also provide that the Government shall have the right, in its discretion, to settle and pay any or all claims arising out of the termination of such subcontracts. This right does not obligate the Government to settle and pay termination claims of subcontractors. As a general rule, the prime contractor is obligated to settle and pay such claims. Where, however, the contracting officer determines that it is in the best interest of the Government to settle and pay direct a subcontractor's termination claim, he shall first obtain approval in accordance with agency procedures. An example of a situation in which the best interest of the Government would be served by effecting a direct settlement would be where a subcontractor is the sole source for a product and it appears that a delay by the prime contractor in setlement or payment of the subcontractor's claim would jeopardize the financial position of the subcontractor. Direct settlements with subcontractors are not encouraged.

§ 1-8.209 Settlement agreements. § 1-8.209-1 General.

When a settlement has been negotiated with respect to the terminated portion of a contract and all required reviews have been obtained, the contractor and the contracting officer shall enter into a settlement agreement, substantially in the appropriate format set forth in § 1-8.806. The settlement shall cover (a) any setoffs and counterclaims which the Government may have against the contractor and which may be applied against the terminated contract, and (b) all claims of subcontractors except claims which are specifically excepted from the agreement and reserved for separate settlement.

§ 1-8.209-2 Excepted items.

Where any rights or claims of the Government or of the contractor are to be excepted from the settlement, the settlement agreement shall specify the nature and extent of the excepted items. However, care shall be taken so that the wording of the exception does not create any new rights in the parties beyond those in existence prior to the execution of the settlement agreement. The separate settlement of excepted items shall be in accordance with the provisions of this Part 1-8 and shall be set forth in settlement agreements. § 1-8.209-3 Government property.

Before any settlement agreement is executed, the contracting officer shall determine the accuracy of the Government property account, if any, for the terminated contract. If the audit discloses property for which the contractor cannot account, the settlement agreement shall reserve the rights of the Government with respect to such property or make an appropriate deduction from the amount otherwise due the contractor.

§ 1-8.209-4 No-cost settlement.

(a) If no costs have been incurred by the contractor with respect to the terminated portion of the contract or if the contractor is willing to waive the costs incurred by him and if no amounts are due to the Government under the contract, a no-cost settlement agreement shall be executed substantially in the format set forth in § 1-8.806-6 § 1-8.806-7, as applicable.

or

(b) Under a terminated cost-reimbursement type contract, the settlement